STATEMENT OF

CHANGES IN
EQUITY

LESSON OBJECTIVES

1. Define the Statement of Changes in Equity (SCE).

2. Identify the items that appear on the face of the SCE.
3. Describe the line items that are included in the Shareholder’s Equity Section.
4. Prepare SCE

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 MOTIVATION

What is your biggest investment so far?

You have learned that cash is a very important asset. You must use it efficiently and
effectively. Therefore, you should make a careful analysis on where you are going to invest
your cash, it should be on something that will give you value and appropriate return.
As a student, knowledge is your best investment, the reason why you need to value education
and apply whatever you have learned.
As the famous sayings go:
If you think education is expensive, try ignorance. – Jeff Rich
Education is the best weapon that you can use to change the world. – Nelson Mandela

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 DISCUSSION:
THE INFORMATION OF
STATEMENT OF CHANGES
IN EQUITY

STATEMENT OF CHANGES IN EQUITY: DEFINED

You have learned that Equity is defined as the residual interest in the assets of the entity after
deducting all its liabilities and the amount invested by the owner.
Equity is sometimes called “capital, or proprietorship”.
Statement of Changes in Equity presents the summary of the changes that occurred in the
owner’s equity of the firm in a specific period. It also reflects all the elements that caused
changes in an entity’s equity between two dates of the Statement of Financial Position (SFP).
The SCE of sole proprietorship and partnership is usually affected by the following items:

ADD or DEDUCT: ADD: DEDUCT:

INCOME / LOSS ADDITIONAL WITHDRAWAL
DURING THE PERIOD INVESTMENTS OF CAPITAL

Withdrawals / Drawings is defined as the amount taken out of the business. It decreases the
amount of O.E.

TWO TYPES OF WITHDRAWAL

TEMPORARY DRAWING PERMANENT DRAWING

• Owner’s withdraws assets from • Owner’s withdraws assets

the business in anticipation of from the business and has no
future profits. intention of returning the
• Recorded as: amount.
DR – Owners’ Drawing • Recorded as:
CR – Cash / Assets DR – Owner’s Capital
CR – Cash / Assets
MARIA AILEEN N. CANDELAZA, LPT BUS S211
JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 IMPORTANT THINGS YOU NEED
TO KNOW IN RECORDING TYPES
OF DRAWINGS

TEMPORARY DRAWING
Date Particulars P/R DR CR
Month Edward Elric, Drawing Pxxx
xxx Cash or other Assets Pxxx
To record owner’s drawing for
personal use
PERMANENT DRAWING
Date Particulars P/R DR CR
Month Edward Elric, Capital Pxxx
xxx Cash or other Assets Pxxx
To record owner’s permanent
drawing of assets from the business

THIS IS HOW YOU PREPARE

YOUR SCE

The following balances of some accounts are presented by Edward Elric Merchandising for the
year ended December 31, 2019 prior to the closing of Income and Expense Summary Account
(IESA). (1) Elric, Capital – P680,000, (2) Elric, Drawing – P 30,000
The IESA for the year ended December 31, 2019 has a credit balance of P128,000 after closing
of revenue and expense accounts. During the year, Elric made an additional investment of
P250,000

Required: Prepare an SCE for Edward Elric Merchandising.

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 EDWARD ELRIC MERCHANDISING
STATEMENT OF CHANGES IN EQITY
FYE DECEMBER 31, 2019
Elric, Capital, January 1 P 680,000
Add: Net Income P 128,000
Additional Investment 250,000 378,000
Total P1,058,000
Less: Elric, Drawing (30,000)
Elric, Capital, December 31, 2019 P1,028,000

CORPORATION
For a corporate entity, the equity of the shareholders may be classified as (1) share capital, (2)
retained earnings, and (3) reserves.
1. SHARE CAPITAL represents the funds contributed by shareholders. It is also the money a
company raises by issuing (1) common or (2) preferred stock.
Share capital is reported by a company on its balance sheet in the shareholder's equity section.
The information may be listed in separate line items depending on the source of the funds. These
usually include a line for common stock, another for preferred stock.
https://quotes.thefamouspeople.com/benjamin-graham-156.php
A company may opt to have more than one public offering after its initial public offering (IPO)

An initial public offering (IPO) refers to the process of offering shares of a private corporation to
the public in a new stock issuance. Public share issuance allows a company to raise capital from
public investors. (you will study this specifically in your Business Finance subject)

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 2. RETAINED EARNINGS (RE) is the amount of net income left over for the business after it has paid
out dividends to its shareholders.
Dividends is the sum of money paid regularly (typically quarterly) by a company to its
shareholders out of its profits (or reserves).
3. RESERVES are line items in the equity section that include (A) appropriation reserves, (B)
share premium, (C) revaluation adjustment, (D) foreign currency translation reserves

DETAILED EXPLANATION OF
KIND OF RESERVES

A. Appropriation Reserves refers to a transfer of an amount from the retained earnings. It is

created to give the entity and its creditors an added measure of protection from the effects
of losses.
Example: Reserves cash to pay the creditors or the allocation of cash for buying PPE.

B. Share Premium represents the excess amount contributed by the shareholders over the par
value. Par value is the minimum issue price of the shares appearing on the face of the
certificate of stock.
Example: A company issues 1,000 shares at a par value of P0.01 per share. The company
actually received P15 per share during an offering. The difference between the par value and
the subscription amount is the share premium.
1000 x P0.01 = P10 per share
P15 – 10 = P5 share premium

C. Revaluation Reserves are most often used when a long-term asset’s market value greatly
fluctuates or is volatile due to currency relationships. This reserve is also used when the fair
market value of a PPE after deducting depreciation or impairment (permanent reduction in
fixed assets) is not equal to the net book value of the asset. (Net book value is original cost
less accumulated depreciation)
Example: Using the Straight-Line Method of Depreciation, the net book value of the
equipment is P50,000 but due to market volatility, the equipment was valued as P55,000.
Therefore, the P5,000 balance will be taken from the Revaluation Reserves.
D. Foreign Currency Translation Reserve: is used to convert the results of a parent company's
foreign subsidiaries to its reporting currency. This is a key part of the financial statement
consolidation process. The steps in this translation process are as follows:

1. Determine the functional currency of the foreign entity.

2. Remeasure the financial statements of the foreign entity into the reporting currency of the
parent company.
3. Record gains and losses on the translation of currencies.

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 Example: If a foreign business entity operates primarily within one country and is not
dependent upon the parent company (like our previous example in OCI, Food Panda’s
mother company is Delivery Hero based in Germany), its functional currency is the currency
of the country in which its operations are located. However, there are other foreign
operations that are more closely tied to the operations of the parent company, and whose
financing is mostly supplied by the parent or other sources that use the dollar.

THIS IS HOW YOU COMPUTE

SHAREHOLDER’S EQUITY OF
A CORPORATION

The shareholder’s equity section of EDWARD ELRIC

COMPANY included the following information
Ordinary shares, par P100 P4,000,000
Share Premium – Ordinary / Common 400,000
Preference shares, par P100 3,000,000
Share premium – Preference / Preferred 450,000
Bonds Payable 2,000,000
Premium on bonds payable 100,000
Appropriation for insurance 300,000
Foreign translation loss 150,000
Required: Determine the following
1. Amount of share capital
2. Amount of reserves
1. The amount of share capital is computed as follows:
Ordinary shares P 4,000,000
Preference shares 3,000,000
Total P7,000,000

2. The reserves amounted to P1,000,000 is computed as

follows:
Share premium – Common P 400,000
Share premium - Preferred 450,000
Appropriation of insurance 300,000
Foreign translation loss (150,000)
Total P1,000,000

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 STATEMENT OF CHANGES IN
EQUITY OF A CORPORATION
EDWARD ELRIC COMPANY
STATEMENT OF CHANGES IN EQUITY
FYE DECEMBER 31, 2019
Shareholders’ Equity
Shareholders’ Capital (Note 8) P 12,000,000
Retained Earning 5,000,000
Reserves (Note 9) 4,800,000
Total Shareholders’ Equity P21,000,000

NOTES TO FINANCIAL STATEMENT

NOTE 8: SHAREHOLDERS’ CAPITAL
Common Shares P 8,000,000
Preferred Shares 4,000,000
Total P12,000,000
NOTE 9: RESERVES
Share premium – Common P 1,200,000
Share premium – Preferred 900,000
Appropriation for plant expansion 1,200,000
Appropriation for contingencies 900,000
Revaluation increment for property 500,000
Foreign currency translation gain 100,000
Total P 4,000,000

Assume further that on January 1, 2019, the beginning balances of related accounts are as
follows:
Common shares P 6,000,000
Preferred shares 3,000,000
Share premium – ordinary 800,000
Share premium – preferred 700,000
Appropriation for plant expansion 800,000
Appropriation for contingencies 600,000
Retained earnings 3,000,000
During the year, the following transactions affected the equity of the company:
1. Net income for the period amounted to P2,900,000
2. The depreciation of the year 2018 was incorrectly overstated by P300,000
3. Dividends declared and paid amounted to P500,000
4. Additional issuance of 20,000 common shares, P100 par at P120 per share and
10,000 preferred shares, P100 par at P120 per share.
5. Additional appropriations where provided during the year.
Required: Prepare the SCE on December 31, 2019
MARIA AILEEN N. CANDELAZA, LPT BUS S211
JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 EDWARD ELRIC COMPANY
STATEMENT OF CHANGES IN EQUITY
FYE DECEMBER 31, 2018
Share Capital Reserves Retained
Earnings
Balances, January 1, 2019 P 9,000,000 P 2,900,000 P 3,000,000
Net income for the period 2,900,000
Correction of prior – period 2014
overstatement of depreciation 300,000
Dividends payment (500,000)
Issuance of 20,000, common shares, 2,000,000 400,000
Par P100 at P120 / shares
Issuance of 20,000, preferred shares, 1,000,000 200,000
Par P100 at P120 / shares
Current appropriation of plant expansion 400,000 (400,000)
Current appropriation of contingencies 300,000 (300,000)
Revaluation increment 500,000
Foreign currency translation gain 100,000
Balances – December 31, 2019 P12,000,000 P4,800,000 P 5,000,000
m

LINKS AND REFERRENCES FOR

ADDITIONAL LEARNING

Here are some helpful links for additional learning, make sure to visit these.

https://www.investopedia.com/terms/s/sharecapital.asp
https://www.accountingtools.com/articles/foreign-currency-translation.html

Textbook: Aduana, N. (2017). Fundamentals of Accountancy, Business, and Management 2. Quezon City.
C & E Publishing Inc.
Reference: Rabo, J., Tugas, F., Salendrez, S. (2016). Fundamentals of Accountancy, Business and
Management 2, Quezon City, Philippines. Vibal Publishing
Robles and Empleo (2016). The Intermediate Accounting Vol. 2. Mandaluyong, Philippines
Millennium Books Inc.
Manalo, M. Learning to Succeed with Accounting 2. Quezon City. Phoenix Publishing House Inc.

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 SUMMARY

Statement of Changes in Equity presents the summary of the changes that occurred in the
owner’s equity of the firm in a specific period. It is consisting of Owner’s capital, drawing,
additional investment and the net income or loss of the business. Owner’s drawing has two
types, temporary and permanent. In preparing the SCE, we add the net income and
additional investment, deduct the drawing, or the net loss.
Corporation on the other hand, has three different types of capital namely: Share capital,
retained earnings, and reserves.
Share capital is further divided into two, which is the common and preferred capital.
Reserves has four classification. They are appropriation reserves, share premium,
revaluation reserves, and foreign currency translation reserves.
The Statement of Changes in Equity of a sole proprietorship and partnership has a different
presentation with the corporation.

REFLECTION

Going back to my question, “what is your biggest investment so far?”

This question does not merely focus in any other asset. There is an investment that is
intangible and will surely give you a long-term value and benefit. And that is education.
Education on the other hand, is not solely achieved in the classroom alone, some of them
are based on experience, good or bad, you learn from them. So do not waste your time
pondering on something that does not worth investing and most of all value your
education.

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
 ASSESSMENT: FORMATIVE

The following information are from Alfonse Elric Trading

SHAREHOLDERS’ CAPITAL
Common Shares P 7,500,000
Preferred Shares 5,200,000
Share premium – Common P 900,000
Share premium – Preferred 800,000
Appropriation for plant expansion 700,000
Appropriation for contingencies 600,000
Revaluation increment for property 500,500
Foreign currency translation gain 90,000

Assume further that on January 1, 2019, the beginning balances of related accounts are as
follows:
Common shares P 5,000,000
Preferred shares 1,000,000
Share premium – ordinary 700,000
Share premium – preferred 400,000
Appropriation for plant expansion 600,000
Appropriation for contingencies 500,000
Retained earnings 2,500,000
During the year, the following transactions affected the equity of the company:
1. Net income for the period amounted to P2,000,500
2. The depreciation of the year 2018 was incorrectly overstated by P100,000
3. Dividends declared and paid amounted to P300,000
4. Additional issuance of 15,000 common and preferred shares, P100 par at P110 per
share.
5. Additional appropriations where provided during the year.
Required: Prepare the SCE for corporation on December 31, 2019

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT
OTHER RELATED LINKS FOR REFERENCES
Retrieved from https://greenbacklabs.com/stocks/common-vs-preferred-stock/
Retrieved from https://www.goodreads.com/quotes/52230-an-investment-operation-is-one-which-
upon-thoroughanalysis-promises
Retrieved from
https://www.iconfinder.com/icons/3191262/analysis_and_reporting_business_analytics_financial_acco
unting_financial_report_organizational_analysis_icon

MARIA AILEEN N. CANDELAZA, LPT BUS S211

JOSE RIZAL UNIVERSITY SHS DEPARTMENT